Between last week and this week, it’s been a particularly busy stretch for retail earnings. Last week, the big department stores reported earnings, July’s retail sales were released today and major retailers continue to report in the next few days. Target Corporation (NYSE: TGT) reports before the opening bell on Wednesday, August 16 and Wal-Mart Stores Inc (NYSE: WMT) reports before market open on Thursday, August 17.
Right now a lot of the retailers are in flux as they continue to adapt to omni-channel strategies that incorporate their stores and e-commerce capabilities. At the same time, there’s been a lot of doom and gloom thinking that the rise in e-commerce could lead to the death of brick-and-mortar retail.
Over the past several years, that combination has resulted in stocks getting hammered when analyst and investors have expressed concern about how legacy retailers are adapting to online competitors and changing consumer trends. There has also been an increased focus among analysts on retailer’s revenues as a proxy for market share compared to similar businesses.
As it always does when industries undergo fundamental shifts, it can take a while for the dust to settle and see where companies end up as retail continues to change at a rapid pace.
Target Earnings and Trading Activity
Comparable-store sales, a metric used to compare sales at stores open a year or more, is an important measure that can show how a retailer’s established stores are performing. In July, TGT announced in a press release that it is expecting a modest increase in comparable-store sales for the second quarter as a result of “improved traffic and sales trends through the first two months of the quarter”.
Since some of the uncertainty regarding TGT’s same-store sales has been lessened, attention among many analysts has shifted towards the company’s margins. CFRA analysts expect margins to decline in the future as the company “invests in enhanced store services, more digital sales, and the launch and marketing of new exclusive brands”. Those analysts also expect a greater mix of online sales in future quarters to further pressure margins. In the first quarter, TGT’s digital sales increased 22% year over year and accounted for 4.3% of the company’s sales.
For the second quarter, TGT is expected to report earnings of $1.20 per share, a few cents below the $1.23 reported in the prior-year period, on revenue of $16.22 billion, according to Wall Street consensus analyst estimates. Revenue expectations for this quarter are pretty much flat to last year’s $16.17 billion.
The stock suffered a big drop at the end of February after reporting fourth-quarter earnings for fiscal 2016 and had been trading in a pretty tight range until it gapped down in mid-June following Amazon.com, Inc. (NASDAQ: AMZN) announcement it would acquire Whole Foods Market, Inc. (NASDAQ: WFM). It’s recovered a bit from that drop in June, but is still down 23.31% year to date as of yesterday’s close.
Around TGT’s upcoming earnings release, options traders have priced in about a 4% potential stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform.
In short-term trading at the August 18 expiration, calls have been active at the 55 and 56 strike prices, pretty much right at the money. On the puts side, trading has been concentrated at the 53.5 and 55 strikes. As of this morning, the implied volatility is at the 72nd percentile.
Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.
FIGURE 1: A TOUGH STRETCH. TGT shares have continued to decline in 2017 and are down 23.31% year to date. Retail stocks have seen a very mixed performance over the past few years as individual companies have adapted differently to e-commerce trends. Chart source: thinkorswim® by TD Ameritrade. Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.
Wal-Mart Earnings and Trading Activity
Last quarter, WMT reported comparable-store sales increased 1.4%, its 11th consecutive quarter of growth, and a modest increase in traffic at a time many retailers were struggling with getting customers into stores. Beyond WMT’s comparable-store sales, its e-commerce efforts have also been a big focus among analysts.
In the first quarter, the company reported 69% growth in online sales, which it primarily attributed to organic growth on Walmart.com. One way WMT has grown its online business is through acquisitions over the past several years.
Most recently, it announced an agreement to acquire online clothing company Bonobos in June and acquired Jet.com for $3.3 billion in September 2016. The company has also announced other initiatives like free two-day shipping, pick-up in store, among others that might attract customers to both its online and physical properties.
For the second quarter, WMT is expected to report earnings of $1.06 per share, down one cent from $1.07 in the prior-year quarter, on revenue of $122.8 billion, according to Wall Street consensus analyst estimates. Revenues are expected to grow 1.6% year over year.
WMT has also suffered a couple of big stock drops over the past several months, the largest being after the announcement of AMZN’s acquisition of WFM. The stock has since recovered from those drops and is up 17.54% year to date as of yesterday’s close. Around WMT’s upcoming earnings release, options traders have priced in about a 3% potential stock move in either direction, according to the Market Maker Move indicator.
In short-term trading at the August 18 expiration, calls have been active at the 80 and 80.5 strike prices, while puts have been active at the 80 and 81 strikes. As of this morning, the implied volatility is at the 66th percentile.
FIGURE 2: WMT YTD PERFORMANCE. WMT dropped in mid-June after Amazon’s (AMZN) announcement that it would acquire Whole Foods Market (WFM) and also dropped in early July following AMZN’s announcement of its Prime Day sales. Since then, the stock has rallied over the past few weeks and is up 17.54% year to date. Chart source: thinkorswim® by TD Ameritrade. Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.
On top of earnings this week, housing starts and building permits data for July comes out tomorrow morning. With that report we’ll see whether or not the strength in June’s housing starts and building permits continued into July.
Tomorrow afternoon, the minutes for July’s Federal Open Market Committee meeting will be released, which could provide more context to the Fed’s thinking regarding its plans to reduce its balance sheet. If you have time, make sure to check out today’s market update to see what else is happening.
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